A paper forthcoming in the QJE by Gabaix & Landier provides a straightforward answer:

"This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay depends on both the size of his firm, and the aggregate firm size. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance.We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. In recent decades at least, the size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.

In particular, in the baseline specification of the model’s parameters, the six-fold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period."

The paper is a very nice application / extension of Rosen's Economics of Superstars paper in the AER.

Wednesday, February 06, 2008

Martin Weitzman has an excellent piece in the Sept. 07 American Economic Review that provides exactly that. He argues that papers using a Rational Expectations Equilibrium (REE) approach generate the equity premium puzzle (it's too big), the risk free rate puzzle (it's too low) and the equity volatility puzzle (it's too volatile compared to fundamentals), by incorrectly assuming that the underlying density generating growth shocks is known to agents. Simply replacing the known variance with an estimated variance (changing the normal density to a student-t density) can actually REVERSE the puzzles.

Maybe I should let him tell it:

"Intuitively, a normal density becomes a Student-t from a tail-thickening spreading-apart of probabilities caused by the variance of the normal having itself a (inverted gamma) probability distribution. There is then no surprise from expected utility theory that people are more averse qualitatively to a relatively thick-tailed Student-t child distribution than they are to the relatively thin-tailed normal parent which begets it. A much more surprising consequence of expected utility theory is the quantitative strength of this endogenously-derived aversion to the effects of unknown variance-structure. The story behind this quantitative strength is that thickened posterior left tails represent structural uncertainty about rare disasters that terrify people. This fear-factor effect holds for any utility function having everywhere-positive relative risk aversion."

So fear of rare events whose generating distributions are not known can cause the puzzles we see without any excessive amount of risk aversion by agents. I think this is a very nice and important paper.

Last night, as we watched the last new episode of House for the foreseeable future, Mrs. Angus commented to me about the abundance of sidekicks named Wilson, and this morning's Plutowalk turned into a spirited debate about their relative merits.

In a Newsweek article about the overselling of happiness, we are told many great people suffered dark moods. The examples are Aristotle, Vincent Van Gogh, Abraham Lincoln, and Morrissey!!

So I'll see your "fourscore and seven years ago", and raise you a "girlfriend in a coma, I know I know it's serious"? This is what Newsweek is telling us?

This may seem like a trivial complaint, but I am telling you that it's a serious tear in the fabric of society. Vincent Van Gogh cannot be compared to Woody Allen (also on the list). Abraham Lincoln cannot be compared to freakin' Morrissey.

Tuesday, February 05, 2008

You might like to hear about the country, and about where I work. As I learn more, I’ll tell you more.

1. QatarQatar has more than 800,000 inhabitants, of which only some 15 percent are genuine Qataris. About half the total population lives in Doha, the capital. Workers are from all over; I was recently served by someone from Nepal. Some of you ask what the Qataris think and what they are like. I have no idea. Of all the many people I see, I know only one to be Qatari, and she is in my class. (On my sample of one, Qataris are very nice, very bright and I like them a lot.) We are all foreigners here on one or another kind of work permit. Many of us foreigners are from Arabic speaking countries, but one does not need to learn Arabic to get around. (I am working on the numbers, having thought that we used Arabic numerals. More on that later.)

It is very difficult to get Qatari citizenship (even harder than getting US citizenship). Perhaps the fact that lots of stuff is free for citizens, and that there are payments by the government to Qatari citizens has something to do with that. There are no income taxes.

Qatar is a monarchy, and an Islamic state. The main ways that this bears on me is that the workweek is Sunday through Thursday, with Friday and Saturday the weekend. Before 1971 it was a British protectorate. The al-Thanis are the royal family. The current Emir succeeded his father when the latter was off gambling somewhere. It is a tight ship, maybe a little like Singapore. The Sheika is the driving force behind the Qatar Foundation and Education City.

2. Higher education. There is a University of Qatar, and a campus of the College of the North Atlantic, a Canadian two year school. We (XXU) are part of Education City, a branch of the Qatar Foundation. There are five schools here, and we will be joined by Northwestern next fall.

The oldest is Virginia Commonwealth University School of the Arts in Qatar, founded in 1998. They have 193 students. Next oldest is Weill Cornell Medical College in Qatar, founded in 2002. They have 203 students. Biggest is Texas A&M University in Qatar (2003), with 268 students. XX University in Qatar was next (2004). We have 163 students majoring is Business Administration and Computer Science. We will have our first graduation at the end of this semester. We are starting an Information Systems major. We share a building with Georgetown University School of Foreign Service in Qatar (2005), which has 110 students. Next year we will be in our own new building, which we will share with Northwestern. Total enrollment among all the schools is 937, and as you see, schools specialize in programs that they are known for.

3. Bicycling XXU has informal volleyball, basketball, football and bicycling. I had known about the cycling and had shipped my bike over. The case and shipping cost more than the bike, which wasn’t real cheap (I was the first on my block to have disc brakes), but XXU gives us a shipping allowance for personal items that covers it. I have already been reimbursed.

There are “slow rides” on Fridays and “serious rides” (longer, with drafting) on Saturdays. (ED: FOGHAT LIVES!!)

So I went for my first ride on Friday, fully expecting to be a laggard on the fast rides, but to hang in there on the slow ones. Well even on the slow rides everyone else was out of sight within the first kilometer. We rode about 16 miles, most of it into a ~12 mph headwind. (I had already ridden over 4 miles to the starting place.)

I was a little embarrassed to be so slow, but was thinking to myself, hey, you’ve been on Medicare for three years! Pretty soon they noticed that someone who had started was not with them, and one or two people took pity on me and rode with me. This gave me company and kept me from becoming hopelessly lost. We got out into the outskirts of Doha after passing hundreds of Al-Mansions under construction. (That’s my inference of Arabic for McMansion.)

The other cyclists are very nice, and we agreed that I should stick to the Friday rides. Even so, there were two guys on Friday who had run a marathon in Dubai the previous week, and one of them is an ex-Marine tri-athlete who had done the Alcatraz triathlon. This means swimming from Alcatraz to San Francisco (brrr), biking ten miles on the hills of San Francisco; and then running for who knows how many more miles. Jerry Boskin, the tri-athlete has a sweat shirt on the Alcatraz Triathlon which has the slogan “between a rock and a hard place.” He claimed to be out of shape for biking, but I never saw him on the bike trip, he was so far ahead of me.

Well that’s the current news from Doha. About the only thing I am not enjoying is SXXXX’s absence, but we still chat at least once a day.

I guess it's high time we realized we are all just wards of the government and we better think twice before we become a financial burden to it. It turns out that there's no reason to fight obesity, because dying young is a real money saver. I am not making this up.

"Preventing obesity and smoking can save lives, but it doesn't save money, researchers reported Monday. It costs more to care for healthy people who live years longer, according to a Dutch study that counters the common perception that preventing obesity would save governments millions of dollars. "It was a small surprise," said Pieter van Baal, an economist at the Netherlands' National Institute for Public Health and the Environment, who led the study. "But it also makes sense. If you live longer, then you cost the health system more."In a paper published online Monday in the Public Library of Science Medicine journal, Dutch researchers found that the health costs of thin and healthy people in adulthood are more expensive than those of either fat people or smokers....Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on. The cost of care for obese people was $371,000, and for smokers, about $326,000. The results counter the common perception that preventing obesity will save health systems worldwide millions of dollars."

Five observations:

(1) I swear this is not from the Onion.

(2) Wouldn't it be best to have fat smokers? Would that not stand a good chance of getting our cost to the government down below $300,000?

(3) Are there really no important benefits from living longer and healthier lives? Really?

(4) Isn't the logical end of this road an extremely repugnant one?? Once your health care costs the government over $250,000, you're done. You're soylent green.

(5) Crap like this makes me more convinced than ever that I do not want any sort of single payer government monopoly health care system.

So grab some Krispy Kreme and fire up a Camel, people. We don't want to be a burden on the gubmint when our tax-paying days are through!

Monday, February 04, 2008

Tomorrow is the big day, and the conventional wisdom is that McCain will emerge with a stranglehold on the nomination while Obama and Clinton will still be in a dogfight.

However, pollsters have not exactly covered themselves in glory so far this primary season, so I think anything can still happen (well, Ron Paul ain't gonna win, but you know what I mean).

I base my political wishes on two things. (1) a fervent desire for gridlock. (2) a visceral hatred of flip-floppers and panderers.

This of course puts me rooting for the Republicans in the general election for reason (1), and preferring Obama over Clinton and McCain by a mile over Romney (as Don Rickles is ironically known as Mr. Warmth, so could Mitt be known as Mr. Sincerity), for reason (2).

However, I think that Hillary is more "beatable" in the general election so (1) weighs in her favor there. It would be optimal on gridlock grounds to have McCain vs. Hillary, but I still actually find myself rooting for Barack Obama to secure the nomination. I always thought I was lexicographic in gridlock, but maybe not. In fact, definitely not. If Romney is the nominee, I'll support the Democratic candidate (Ann Coulter style)!! Take that Mitt you evil flip-flopper!

"Britons are losing their grip on reality, according to a poll out Monday which showed that nearly a quarter think Winston Churchill was a myth while the majority reckon Sherlock Holmes was real."

2. Telephone for Colin Montgomerie!

"British women had facelifts and men had tummy tucks and "man boobs" removed in record in numbers in 2007, new data released on Monday revealed. According to the British Association of Aesthetic Plastic Surgeons (BAAPS), 32,453 surgical procedures were carried out on men and women in Britain last year, a 12.2 percent increase on 2006".

3. I think they better change the name.

An American firm, General Sports and Entertainment, has acquired Derby County Football Club of the English Premier League. Derby have looked pitiful on the pitch this year and are anchored at the bottom of the league table, but GSE apparently see a future in the top flight for Derby.

The number of foreign-owned clubs is now at about half the league total, with four clubs in American hands (Aston Villa, Derby, Liverpool, and Man U). This is bizarre - is there any other prominent league like this? Of recent transactions that I recall, only Newcastle have been transferred to an English owner. Why the foreign invasion in the EPL?

Sunday, February 03, 2008

In the National Football League (NFL), games ending in a tie are determined by sudden death overtime where the first team to score wins. Sudden death is an efficient means to decide a game which is violent and exhausting.2 However, the sudden death nature confers a significant advantage on the team who has the first possession. While the outcome of a coin flip to determine first possession is ex ante fair, immediately after the toss it is no longer fair because the winning team has a significant chance of scoring on its first possession. NFL Commissioner Paul Tagliabue has said that “There has been a trend in the last seven or eight seasons that the team winning the toss in overtime wins the game. That advantage of receiving the ball first is becoming unbalanced.”

An interesting point. We aren't supposed to be resolving the outcome with a coin toss. We are deciding FIRST POSSESSION with a coin toss, and the teams are supposed to play out the result, sudden death.

But if winning the coin toss is (nearly) tantamout to winning the overtime, then what is the point?

I think hockey, soccer, and basketball have much fairer systems for resolving ties. And baseball can be excruciating, but there is no question you get your shot in "overtime."

An actual email, received from an actual student, by an actual professor. I have changed details and names, to protect the "innocent."

To put it in context, the prof is teaching an American politics course. Mostof the readings are on JSTOR. Here's the email:

Good afternoon-

XXXXX from your YYYYYY class (NNN) here, I just have a quick question for you regarding the JSTOR articles. I'm hoping/trying to get a jump on them and at least have them all printed out early and have them at hand.

But, regarding the {date} and {date} pieces, "Articles of Federation," and "U.S. Constitution," no authors were listed and I'm having some trouble locating the exact articles. And, when I search within the JSTOR database for "articles..." and "constitution..." there are a number of results.

-It just helps to have the author's name to narrow down the search to fewer articles within JSTOR and find the piece more easily.

I'm sure I'm missing something on this, but, could you lend a hand on this?

ps. from the same article linked above, Mike Huckabee says it's time for Mitt to drop out of the race (I am NOT making this up!!!):"I think it's time for Mitt Romney to step aside," the former governor, who has won only the Iowa caucuses, said on CNN. "If he wants to call it a two-man race, fine. But that makes it John McCain and me."

During the long course of my painstaking research for the previous post, I found the following gem written by David DiBiase of the band "Breezewood Honeymoon"

"Now look at those professors—that’s the way you do itYou do your research with your PhDThat ain’t working—that’s the way you do itMoney for talking and write for free

That ain’t working—that’s the way you do itLet me tell you those professors ain’t dumbMaybe get a blister on their typing fingersMaybe get a little blister on their tongues

They want to publish peer-reviewed papersThey got the fire in the bel---lyThey are movers and shakersBecause they have that damned degree

See that rumpled fellow with the pipe and the tweed coatGranny glasses and the thinning hair?That rumpled fellow is a famous scholarThat rumpled fellow is a luminaire

He wants to publish peer reviewed papers… (etc.)

Someday I’ll finish my dissertationI’ll write it up and I’ll turn it inSomeday I’ll have me a tenure-track positionMan, that’s when the fun beginsI’ll teach class Tuesday and ThursdayI’ll leave the research to my adviseesI’ll criticize them in office hoursI’ll give them all the third degree

They’ve got to publish peer reviewed papers… (etc.)

That ain’t working—that’s the way you do itThey leave the research to their adviseesThat ain’t working—that’s the way you do itMoney for talking and write for free"

I suggest that any candidate struggling to survive the primaries would do well to consider employing the consulting firm of F&R Castro to direct their campaigns.

Yes it was just election time in Cuba people. 76 year old Raúl pulled down 99.6% in his legislative district topping even Fidel's 98.4%. The brothers apparently have huge coattails as their full slate of 612 other candidates all won election with a minimum of 73% of the vote.

How did Raúl do it?

"While far less prominent globally than his brother, Raúl Castro has long been popular in eastern Cuba, playing up his rural roots and down-home sense of humor. Some Cubans consider him more pragmatic than his visionary brother."

Excerpt:Economists are asking the wrong question, Mr. Bloom said at the panel. They assume that “everything is subject to market pricing unless proven otherwise.”

“The problem is not that economists are unreasonable people, it’s that they’re evil people,” he said. “They work in a different moral universe. The burden of proof is on someone who wants to include” a transaction in the marketplace. (Mr. Roth, who acknowledges that “economists see very few tradeoffs as completely taboo,” did not take the criticism personally.)

The theologian Michael Novak, who is also a resident scholar at the American Enterprise Institute, similarly argued that “not all ethical principles fit under economic reasoning,” adding, “the resistance to money is very old and very deep.”

Just to clarify, my remark about evil economists was a joke. This was obvious at the conference itself, though unfortunately not from the NYTimes article.

Well. Here are my thoughts:

The desire to commit rape is also very old and very deep. But it is morally repugnant, and modern society has managed to force men to suppress this desire, partly through socialization and partly through the threat of punishment as a deterrent. Now, most of us agree that rape is a truly terrible crime.

Envy is also an ancient impulse, "very old and very deep." And it is not nearly as awful as the desire commit rape. But it is still bad. Why do government institutions, and psycho-babble "scholars," get to raise the morally repugnant impulse of envy to the status of a virtue? Society will only progress if we begin to treat envy, and the desire to control other peoples' property and bodies, the way we have already ostracized baser impulses.

(A caveat, to the hysteria-and-anxiety-professionals out there: The impulse to rape is morally more repugnant than the impulse to act on envy. They are similar in kind, but much different in the degree to which they invade one's person and one's dignity. Although, the forcible theft of property and livelihood based on "fairness", the brittle mask envy wears in the moral universe, can come close to rape in its effects. But, yes, rape is worse. My point is only that the fact that an impulse is "very old and very deep" doesn't make it right: rape is old and deep. It's wrong. Distrust of money, based on envy and superstition, is old and deep. It's wrong, too).

The official Indie buzz is huge for NY's Vampire Weekend. Their first album is out and highly rated by Pitchfork. I have to say that they just don't do it for me, people. Their sound is tinny and forced. They seemed, planned, artificial, inauthentic. It seems like they are basically just "havin' a laugh".

Even the rave Pitchfork review describes them as "nothing but clean-cut pop and preppy new wave, tucked-in shirts and English-lit courses."

Ouch!

Let me suggest two alternatives to the alternative plat du jour.

1. Tokyo Police Club. They too have a new album but to me a way more indie vibe and sound. I really like these guys.

2. Times New Viking. Now these guys are indie as F***!! Hot Fuzz would be a good way to describe their sound. Highly distorted and highly recommended.

Friday, February 01, 2008

They're going to make the playoffs and be a tough seven or eight seed," he said. "They're settling into their roles. There's no way I don't see them not getting in as the seven or eight seed, especially in the East."

The article points out that the Knicks are "only" 5 games out of the 8th and final slot right now, but somehow neglects to inform us that they are in 14th place (out of 15) with 6 teams between them and the promised land.

This bit of foolishness brings to my mind the immortal words of Jim Mora Sr.: "Playoffs?? Playoffs?? Are you kidding me?? Playoffs??"

*I have searched and searched but cannot find any video of Zeke and Magic's magic moment before the start of the 1988 NBA finals. Can anyone help me out?